Air Products and Chemicals (APD) is one of the world’s leading suppliers of atmospheric gases and chemicals for industrial applications. These gases include hydrogen, helium, nitrogen, and other gases commonly used in industrial manufacturing. The company also sells specialty gases in addition to performance materials and chemicals. Air Products has a solid business model and intriguing growth prospects over the long term.
This international powerhouse currently has over 21,000 employees and operates in more than 50 countries. It serves a diverse range of industries that include: food and beverage, health and personal care, energy, transportation, and semiconductors. In 2013, foreign sales accounted for 58% of the company’s total top line. With a well-diversified clientele, APD sales have historically been a good indicator of global manufacturing activity.
The company has not strayed far from its historical roots. Started in 1940, Air Products originally specialized in selling oxygen generators to industrial clients and the military. Over the subsequent decades, the company expanded its product offerings to include liquid hydrogen and nitrogen in support of America’s emerging missile and space program.
As the years passed, the company expanded beyond building-block gases into the chemicals business. A series of timely acquisitions and joint ventures helped transform this modest company into a global leader. These days, the company has its sights set on emerging markets like China and South America. Indeed, APD has succeeded in forming partnerships with local producers and made some major inroads by leveraging its technology and expertise.
In the near term, the company will likely see increased demand for its world-class liquefied natural gas (LNG) technology. Earlier this year, Air Products announced the opening of a new facility in Bradenton, Florida that will produce LNG heat exchangers. Too, the company won a contract for a new LNG plant that will be constructed on the Yamal Peninsula in Russia. Under the terms of the agreement, APD will supply three MCR cryogenic heat exchangers, the core component of the natural gas liquefaction process.
Air Products competes in an industry that has somewhat high barriers to entry, but local low-cost providers are also a concern. In less economically developed countries, regulatory oversight tends to be more lax, which can allow some producers to cut corners. Air Products, however, has made it clear that it prioritizes safety and environmental sustainability in all of its business decisions. Although this may have a deleterious effect on near-term margins, things should change over the long-term horizon. As the global middle-class continues to expand, public demand for socially responsible businesses ought to strengthen.
Air Products’ primary competitors include Praxair (PX) and Airgas (ARG). Foreign companies like Air Liquide, Air Water, and The Linde Group also compete in this space. Air Products is one of the largest players in this arena, and has substantial balance sheet resources. Over the long term, the company will likely continue to build its market share through a combination of new acquisitions and organic growth.
The company has recently seen the limelight thanks to activist investor, William Ackman. At the time that this article was published, his hedge fund, Pershing Square, had invested well over $2 billion in APD, and currently controls roughly 10% of its outstanding shares. Shortly after Pershing Square announced its stake, APD’s CEO, John McGlade, agreed to retire. Air Products is currently searching for a replacement CEO, with the hope that the new executive can unlock the company’s long-term potential under his/her tenure. APD’s margins trail some of its more successful competitors, so the company does theoretically have some room to improve.
Air Products and Chemicals is heavily dependent on global manufacturing activity, and recent geopolitical disturbances may have a negative impact on its business if global economic activity starts to recede. That said, even during uncertain times, things need to be produced. Whether it is electronics or missiles, the company will continue to play an integral role in the global supply chain. For more detailed information about APD’s near- and long-term prospects, subscribers should check out our routine coverage in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.